I’m Saving Enough To Get the 401k Match From My Employer, Where Do I Invest My Money Next?

by RC on February 23, 2011

It’s pretty standard advice that everyone should put enough money into their 401k (or similar retirement plan, such as a 403b) to get the 401k match from their employer, if it is offered and if there is any possible way you can do so.

In fact, it’s probably a good idea to do this above just about anything else, many people say, including paying off debt.

If your employer matches $0.50 on the dollar or even dollar for dollar up to a certain percentage, that is a very good guaranteed return, and everyone should take advantage of it.

Just getting the employer match for retirement investing isn’t going to get you where you want to be with your future retirement goals, however.
You are going to need to invest more.

Paying off high interest debt like credit cards, personal loans or similar debt should probably take priority, but if you have crossed that bridge and eliminated your debts, and are able to invest more for retirement, you most certainly should, and as soon as possible.

Where do I invest my money next?
Where you invest next is sometimes a tricky question though.
3 of the most common options are:

  • Keep investing in your 401k
  • Open a traditional or Roth IRA
  • Invest through some other vehicle (probably not recommended until all tax advantaged retirement options are exhausted)

What Should You Do- Keep investing in a 401k or open a Roth IRA or Traditional IRA?

First, Consider what’s available in your 401k plan

Not all 401k or other retirement plans are created equal. While some plans offer an adequate amount of decent funds over a balanced range of asset classes, others offer a weak group of mutual funds and charge fees which are way too high.

You also may not be able to invest in your choice of asset classes in your 401k, or the choices or choices may be limited to poorly performing ones. This may interfere with your planned asset allocation percentages as well.

For example, your 401k may offer one bond fund or international fund that has a poor history against a known benchmark. If you don’t have any other choices within your 401k plan, you may not want to invest in that particular fund inside your 401k. Then you might have to put that money somewhere
with a higher or lower risk, which is probably not what you wanted to do with that  percentage of your retirement investment.

If your 401k doesn’t have a broad enough number or type of funds for you to set up your overall retirement asset allocation model that you have decided to follow for yourself, it may be a good idea to invest outside of your 401k plan.

As an added bonus, investing outside of your 401k will give you total control of your traditional or Roth IRA- which will give you a lot more  investment choices, allow you choose to when to put money in, etc. To me, this is a compelling reason to go with an IRA after getting the 401k match. You may also want to consider the tax treatment of your retirement investments.

Traditional IRA or 401k vs. Roth IRA

With your 401k or a traditional IRA, you invest with pre-tax dollars, but pay taxes when you eventually withdraw the money. In a Roth IRA, investments are made with after-tax contributions, but your future interest and withdrawals can be made tax free.

Some tax diversification is probably a good thing in general,  and  if you think you will be in a higher tax bracket in the future at retirement or when you start withdrawing, it may be a good time to diversify some by investing in a Roth IRA. This case could also occur if you are just starting in the work force and are on the low end of your career salary range.

For those looking for an additional tax deduction, the traditional IRA may make more sense.

Either way, be in control of your own retirement investments can be a good thing- after all, who cares more about your money than you? (Note: I may be a little jaded here- I find my employer’s 401k options to be fairly poor, in my opinion.)

After you’ve hit the limits for a traditional or Roth IRA, you can and probably should put any additional money you might have available for retirement investing into your 401k, until hopefully you max it out.

If you reach that point, you’re really doing great. (I wish I was there!)

If not, and there is nothing to be ashamed of if you can’t save that much for retirement right now-it can be very hard-  but why not make it a goal for the near future?

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{ 1 comment… read it below or add one }

Dr. Timothy Lawler February 24, 2011 at 7:08 am

Great overview. I agree that it completely depends on what you are looking for. I would go even further to say that if you have AT LEAST 20yrs until you retire, then you should shoot for a Roth IRA. Some places are even looking to start Roth 401ks. Yeah, that would be pretty unreal. We’ll see if this becomes popular. Anways, keep up the great posts!


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